Assessing the Effectiveness of Aid for Trade

Transcription

1 July 2013 ICTSD Programme on Competitiveness and Development Aid for Trade Series Assessing the Effectiveness of Aid for Trade Lessons from the Ground By ICTSD Issue Paper No. 29

2 July 2013 l ICTSD Programme on Competitiveness and Development Assessing the Effectiveness of Aid for Trade Lessons from the Ground By ICTSD Issue Paper 29

3 ii ICTSD Assessing the Effectiveness of Aid for Trade: Lessons from the Ground Published by International Centre for Trade and Sustainable Development (ICTSD) International Environment House 2 7 Chemin de Balexert, 1219 Geneva, Switzerland Tel: Fax: ictsd@ictsd.ch Internet: Publisher and Director: Ricardo Meléndez-Ortiz Programmes Director: Christophe Bellmann Programme Team: Vinaye Dey Ancharaz, Paolo Ghisu and Anne-Katrin Pfister Acknowledgments This paper has been produced under the ICTSD Programme on Competitiveness and Development. ICTSD wishes gratefully to acknowledge the support of its core and thematic donors, including: the Ministry for Foreign Affairs of Finland; the UK Department for International Development (DFID), the Swedish International Development Cooperation Agency (SIDA); the Netherlands Directorate- General of Development Cooperation (DGIS); the Ministry of Foreign Affairs of Denmark, Danida; and the Ministry of Foreign Affairs of Norway. This paper was prepared by Vinaye Dey Ancharaz, Paolo Ghisu, Christophe Bellmann and Petra Walterova from ICTSD. For more information about ICTSD Programme on Competitiveness and Development visit our website at Cover photo by Paolo Ghisu ICTSD welcomes feedback and comments on this document. These can be forwarded to Paolo Ghisu (pghisu@ictsd.ch). Citation: ICTSD; (2013); Assessing the Effectiveness of Aid for Trade: Lessons from the Ground; ICTSD Programme on Competitiveness and Development; Issue Paper No. 29; International Centre for Trade and Sustainable Development, Geneva, Switzerland, Copyright ICTSD, Readers are encouraged to quote and reproduce this material for educational and non-profit purposes provided the source is acknowledged. The work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License. To view a copy of this license, visit ISSN

4 ICTSD Programme on Competitiveness and Development iii TABLE OF CONTENTS LIST OF TABLES AND FIGURES LIST OF ABBREVIATIONS AND ACRONYMS FOREWORD 1. INTRODUCTION 1 2. EVALUATING AID FOR TRADE: WHY, HOW AND WHAT? Why Evaluate AfT? Evaluation Methods and Difficulties The ICTSD-SAWTEE Methodology 3 3. AID FOR TRADE GLOBAL TRENDS Aid for Trade: Is It Additional? AfT to LDCs Other Trends Emerging Economies Trade-Related Aid 8 4. INSIGHTS FROM COUNTRY EXPERIENCES IN MANAGING AFT Utilisation of AfT Funds Ownership at Country Level: Mainstreaming of Trade and Multi-Stakeholder Coordination Donors Responses to Countries Trade and Development Needs AfT, Environmental Sustainability and Climate Change South-South Cooperation From Implementation to Impact CONCLUSION AND THE WAY FORWARD 21 ENDNOTES 23 REFERENCES 24 ANNEX 1: SUMMARY OF FINDINGS BY KEY INDICATORS OF THE ICSTD/ SAWTEE METHODOLOGY 26 iv v vi

5 iv ICTSD Assessing the Effectiveness of Aid for Trade: Lessons from the Ground LIST OF TABLES AND FIGURES Table 1: A Description of the ICTSD-SAWTEE methodology Table 2: Reason for Low AfT Absorptive Capacity in Nepal Figure 1: Global AfT Commitments and Disbursements Figure 2: Global AfT and Non-AfT ODA flows Figure 3: AfT and Non-AfT ODA Disbursements in LDCs Figure 4: Aid for Trade, Sectoral Distribution,

6 ICTSD Programme on Competitiveness and Development v ABBREVIATIONS AND ACRONYMS AfDB AfT CGE CRS DAC DfID DTIS ENTReC Exim Bank FDI HIPC ICTSD IFC LDCs MoCS NTIS ODA OECD PENX SAWTEE SVEs TRTA/CB USAID WTO African Development Bank Aid for Trade Computable general equilibrium Creditor Reporting System Development Assistance Committee Department for International Development, UK Diagnostic Trade Integration Study Enhancing Nepal s Trade Related Capacity Export-Import Bank Foreign Direct Investment Heavily Indebted Poor Country International Centre for Trade and Sustainable Development International Finance Corporation Least developed countries Ministry of Commerce and Supply, Nepal Nepal Trade Integration Strategy Overseas development assistance Organisation for Economic Cooperation and Development Plan Estrategico Nacional Exportador, Peru South Asia Watch on Trade, Economics and Environment Small and vulnerable economies Trade-related technical assistance and capacity building United States Agency for International Development World Trade Organisation

7 vi ICTSD Assessing the Effectiveness of Aid for Trade: Lessons from the Ground FOREWORD This paper examines the conditions that make Aid for Trade (AfT) effective by looking at countryspecific factors based on the direct experience with AfT of eight developing countries, including four least developed countries (Bangladesh, Cambodia, Malawi, Nepal), three lower-middle income countries (Ghana, Guatemala, the Philippines) and one upper-middle income country (Peru). Assessments of the AfT initiative have been undertaken in these countries by ICTSD since mid-2010, using a methodology that the Center has developed jointly with the South Asia Watch on Trade, Economics and Environment. The paper does not seek to offer a conclusive statement about whether AfT has or has not worked in a given country. Instead, it focuses on identifying those factors or circumstances that appear to enhance the effectiveness of AfT, and this with the aim of teasing out lessons of best practice that could inform and enhance the initiative in the future. This study, as well as the eight country-analyses, offers fresh insights into the dynamics of AfT on the ground, the institutional set-up underlying the initiative and its weaknesses. Overall, the findings are not radically different from what has emerged from the more general aid effectiveness debate. In short, AfT is likely to be effective when the host country has the appropriate institutions and human resources to utilise aid; when the aid program enjoys broad local ownership, including political ownership; and when donor objectives are aligned with local priorities. To these, we shall add that, specifically for AfT flows, it is crucial that these are additional, and not just a diversion from existing aid resources. The findings have important implications for taking the AfT initiative forward. The most important constraints to aid effectiveness are conditions specific to the host country rather than to the AfT initiative itself. While developing countries should step up efforts to mainstream trade and take a more active and participatory role in AfT project design and implementation, donors, on the other hand, should do more to build the absorptive capacity that developing countries critically lack. Through this analysis, ICTSD aims to contribute to the ongoing discussion on the AfT Initiative and to provide information and evidence to guide developing countries and their trade and development partners in designing and implementing more effective AfT programmes in the future. Ricardo Meléndez-Ortiz Chief Executive, ICTSD

8 ICTSD Programme on Competitiveness and Development 1 1. INTRODUCTION This paper enquires into the conditions that make Aid for Trade (AfT) effective by drawing from evidence on the ground. This evidence is not quantitative nor does the paper purport to undertake a systematic evaluation of the Aid for Trade initiative. Instead, it is based on a set of country-level case studies that the International Centre for Trade and Sustainable Development (ICTSD) has undertaken since mid-2010, using a unique methodology developed jointly with SAWTEE. 1 The ICTSD studies offer fresh insights into the dynamics of Aid for Trade on the ground, the institutional set-up underlying the initiative, and its weaknesses. The methodology, based broadly on the Paris principles, allows an assessment of AfT effectiveness using a combination of quantitative indicators and information from key stakeholders, obtained through interviews. Unfortunately, there is no way of aggregating these diverse indicators into a conclusive statement about AfT effectiveness. Hence, as far as possible, we shall avoid making inferences about whether AfT has or has not worked in a given country. We focus instead on pointing out those circumstances that appear to enhance the effectiveness of AfT with the aim of teasing out lessons of best practice that could inform and enhance the initiative in the future. The findings, ultimately, have a sense of déjà-vu: AfT seems to be most effective when it is additional and predictable; when AfT projects are owned by the host country and trade mainstreamed into the national development strategy; when donor objectives are aligned with the recipient government s priorities; and, critically, when adequate local absorptive capacity exists. The case studies also reveal a lack of awareness of the AfT initiative both in concept and in practice, even among those responsible for implementing such AfT projects in the country. It appears that this situation is due both to a definitional problem as well as poor coordination among implementing agencies. The rest of the paper is organized as follows. The next section explains the need for AfT evaluation, presents some available evidence and describes briefly the methodology used in ICTSD country studies. Section 3 discusses some trends in AfT to place in context the discussion in the following section on the additionality and predictability of AfT funds. Section 4 provides insights from the country studies. Section 5 summarizes the key findings, draws out lessons of best practice and offers some thoughts on the way forward.

9 2 ICTSD Assessing the Effectiveness of Aid for Trade: Lessons from the Ground 2. EVALUATING AID FOR TRADE: WHY, HOW AND WHAT? 2.1 Why Evaluate AfT? The need to evaluate Aid for Trade is as old as the initiative itself. In its 2006 report, the WTO Task Force called for concrete and visible results on the ground, arguing that such results would provide strong incentives to both donors and recipients to advance the Aid-for-Trade agenda. 2 However, while the Task Force set a number of goals for the Aid for Trade initiative to pursue, it fell short of providing any guidelines on how to conduct a proper evaluation of the initiative. In the meantime, a number of developments have made evaluation more urgent than ever before. First, donors are facing a tight budget situation at home, forcing them to reassess their external aid policy. Second, the landscape for aid has changed dramatically with the rise of emerging economies, whose Aid for Trade activities, while significant; remain largely outside of the DAC framework. Finally, the demand for greater transparency and accountability in developing countries has increased with the return of democracy in many countries and aided by rapid and efficient information exchange. Perhaps more than ever before, there is a need to demonstrate to donors that Aid for Trade is value for money and that their disbursements help poor countries harness the benefits of trade as an engine of development. Concrete evidence that goes in this direction will help secure the future of Aid for Trade while bringing to light the factors that reduce aid effectiveness could guide efforts aimed at improving the initiative s impact. 2.2 Evaluation Methods and Difficulties A variety of methods have been proposed to evaluate AfT, and these have generated evidence of various kinds. The Third Global Review in 2011 threw the spotlight on 275 case stories of AfT and more than 140 selfassessments by partner countries and donors that the OECD and the WTO had compiled. However, most of these case stories were based on specific AfT projects in a country or at the regional level. While this exercise provided unique insights on selected issues, the evidence collected through the case stories remained anecdotal in nature, and understandably focused on the rather positive impacts of AfT. A meta-evaluation of AfT by the OECD, drawing on projects in two sectors transport and storage in two countries, Ghana and Vietnam, over the period offers a more nuanced view on the effectiveness of AfT. 3 This study, based on a count of key words occurring in evaluations of trade-related operations by aid agencies, shows that trade or trade policy linkages hardly ever feature in these evaluations. More importantly, the evaluations provided little insight into AfT s impact: causal links between projects and performance were hard to establish. A more systematic approach to AfT evaluation centers on the Paris principles, as recommended by the WTO Task Force. This approach implicitly assumes that aid will be effective in terms of achieving its goals if it adhered to the Paris principles of strong ownership, alignment of aid along national priorities, coordination among donors, mutual accountability and transparency, and adequate absorptive capacity in the host country. An analysis of donors evaluations of trade-related technical assistance and capacity building (TRTA/CB) programs by the OECD confirms that most of the success stories were indeed cases where these good practices were faithfully adopted. 4 Some studies have used econometric analysis to identify the impact of AfT programs at the aggregate level on some quantifiable target, such as exports or export growth. In general, however, such studies have suffered from the lack of a long-enough time series due to the fact that the AfT initiative was only formally established in Another problem is reverse causality: since AfT is meant to boost exports, one should observe countries with large

10 ICTSD Programme on Competitiveness and Development 3 exports to be receiving small AfT flows. If this endogeneity problem is not properly addressed, a regression of exports on AfT is most likely to yield a negative coefficient on AfT, which could lead to the misleading conclusion that AfT reduces exports! Despite these problems, AfT assessments at the aggregate level, albeit scant, have been more common that project-based evaluations. These studies, such as Ferro et al (2011), Cali and te Velde (2011) and Brenton and von Uexkull (2009), have used regression to investigate the impact of AfT on exports. Several econometric studies have used gravity models (e.g., Portugal-Perez and Wilson, 2012; Shepherd and Wilson, 2009). Some especially on trade facilitation have also used CGE (computable general equilibrium) modeling (e.g., Zaki, 2010) but these studies have not focused on any AfT projects as such; moreover, they have adopted a much larger view of trade facilitation than is commonly understood in the WTO circles. 5 The focus on aggregate-level analysis of AfT is not difficult to understand. It was long thought that AfT projects lacked the characteristics of clinical policy interventions and were therefore not amenable to randomized control trials that have been successfully used in project evaluations in other areas of development assistance (e.g. poverty alleviation or health). Moreover, externalities in AfT projects make it difficult to appropriate benefits and to assign them to a specific project. Incentives and costs are two other constraints to project evaluation (Cadot and de Melo, 2013). AfT project evaluations are likely to suffer from a time-consistency problem: project managers generally loathe undertaking such evaluations knowing that they might be held accountable for poor results. They may find a convenient excuse in the fact that evaluation costs are typically high relative to the value of traderelated projects, making evaluations appear as a waste of resources. However, a culture of rigorous evaluation among AfT donors and implementing agencies is emerging now (Cadot et al., 2011) as the demand for aid to show results has increased sharply. Even so, the uptake is very slow, and concrete evaluations of AfT projects at the national level remain rare. 2.3 The ICTSD-SAWTEE Methodology The methodology used in conducting the country-level studies is based on the Paris principles of aid effectiveness as highlighted above. However, it goes beyond the 5 key elements of the Paris Declaration and includes several other quantitative and qualitative benchmarks. Specifically, the ICTSD-SAWTEE methodology assumes that additionality and predictability of AfT funds are important preconditions for AfT effectiveness, and proposes various indicators to track them. AfT funds are considered as additional if AfT flows to a country have not increased over time at the expense of non-aft ODA flows. A sufficient condition for additionality is that both AfT and non-aft ODA increase consistently through time. Similarly, AfT is said to be predictable if disbursements, on average, keep pace with commitments. Quantitatively, the gap between disbursements and commitments should not widen but preferably narrow down over time. The methodology also explains how some of the other elements of the Paris Declaration could be assessed using quantitative indicators (see Table 1). However, due to data limitations, not all of the proposed indicators could be computed in the country case studies. Ultimately, the methodology produces a combination of quantitative evidence and qualitative data that need to be judiciously used in determining the effectiveness of AfT. To this end, the narratives on impacts at both the macro- and micro levels could be particularly instructive. Our methodology does not purport to provide a binary answer to the question of whether aid for trade in a given context has been effective. It serves rather to draw attention on the essential conditions that affect aid effectiveness and weigh in their implications for the design and implementation of AfT projects in the future. The methodology was applied through a bottomup approach. Each country study was conducted

11 4 ICTSD Assessing the Effectiveness of Aid for Trade: Lessons from the Ground by local independent researchers under the coordination of ICTSD. These researchers, in turn, worked in close collaboration with government agencies, development partners, the private sector and other local stakeholders, collecting data and information through structured interviews. Each draft report was then presented and discussed at a national workshop where initial findings were shared with various stakeholders, whose insights were incorporated in the final report. As a last step, each study underwent extensive peer reviewing by experts from the country concerned and internationally. Through the involvement of local stakeholders the project also intended to strengthen their ownership both of the report and of local AfT programmes, as well as build their capacity for planning, implementing and evaluating projects. Moreover, this inclusive and participatory approach was intended to foster a dialogue among national and regional stakeholders, which is crucial in making AfT effective. Table 1: A Description of the ICTSD-SAWTEE Methodology Aspects Elements Indicators AfT funds trajectory Additionality AfT in the recent period is greater than AfT in the base period ( ) Non-AfT ODA in the recent period is greater than non-aft ODA in the base period Growth rate of non-aft ODA in the recent period is greater than or equal to the growth rate of non-aft ODA in the base period Predictability Variations between commitments and disbursements over time Extent to which AfT programmes/projects have been completed without any constraints Absorptive capacity N/A Capacity of partner country s institutions in utilizing available AfT resources to achieve the defined purposes of AfT programmes/ projects Ownership at country level Mainstreaming of trade Stakeholders coordination Formal and substantive trade mainstreaming: extent to which trade is mainstreamed in national development plans, sectoral policies, line ministries, etc. Percentage of AfT resources allocated to programmes/projects that are considered as priority by the partner country and designed by the partner country. Level of coordination (formal vs. substantive) between ministries and government agencies, as well as other relevant stakeholders (e.g. private sector and civil society) in formulating and implementing trade policies as well as AfT programmes/projects

12 ICTSD Programme on Competitiveness and Development 5 Donors responses to countries trade and development needs AfT Impact Donors alignment Formal and substantive level at which donor priorities are aligned with the partner country s trade and development agenda Use of country systems Impact at macro level Extent to which donors use public financial management and procurement systems of the partner country as well as local human resources Number of projects implemented by government or through the creation of a parallel implementation unit Changes observed in a country s export performance at aggregate level and at the sectoral level through AfT measures Sector- level productivity changes in relation to AfT programmes/projects Role of AfT in enhancing inter-sectoral and intra-sectoral export diversification Effect of AfT in trade policies and regulations as well as in building capacity related to trade amongst government officials (governance) AfT relationship with establishment of new firms and increases in the number of international traders; as well as training/ capacity building of private sector stakeholders related to international trade (private sector development) Allocation of AfT funds towards trade-related infrastructure; reduction in time for the movement of goods and imports/exports procedures Source: Adapted from Adhikari (2011) Impact at project/ programme level (micro-impact) Relevance of the specific programme/project with country s trade and development strategies and priorities Efficiency in programme/project design and involvement of relevant stakeholders in designing the project Extent to which programmes/projects are efficiently managed and implemented and involvement of relevant stakeholders in programmes/projects implementation Effectiveness of project outputs and outcomes in achieving the expected results Impact of the programme/project in achieving the expected results

13 6 ICTSD Assessing the Effectiveness of Aid for Trade: Lessons from the Ground 3. AID FOR TRADE GLOBAL TRENDS This section looks at the latest trends in aid both AfT and ODA to gauge whether commitments are being followed through and whether AfT resources are additional ; to determine whether LDCs have received a fair share of AfT resources; and to examine the sectoral distribution of AfT flows. The section concludes with a discussion of emerging donors, whose engagement is becoming increasingly important but who continue to operate outside of the DAC framework. 3.1 Aid for Trade: is It Additional? The additionality of trade-related development assistance has long been at the centre of AfT discussions. The WTO Task Force on AfT recommended that additional, predictable, sustainable and effective financing is fundamental for fulfilling the Aid-for-Trade mandate. The flow of funds available to support developing countries trade-related needs seems to suggest that AfT resources have been additional. Total AfT committed resources were up from USD 28 billion in 2005 to USD 41 billion in 2011, representing a 45 percent increase over this period. Remarkably, commitments have increased faster in recent years at an average of 7.4 percent per annum between 2006 and 2011 than in the base period of when the increase was 5.4 percent per annum. AfT flows have generally kept pace with committed resources but the wedge between disbursements and commitments has widened since 2007, decreasing only in 2011 when both commitments and disbursements significantly declined as result of the economic crisis (figure 1). Figure 1: Global AfT Commitments and Disbursements 50 USD billion, 2011 constant prices AfT Commitments AfT disbursements Source: OECD Creditor Reporting System (CRS) Database, accessed June However, additionality means not only that AfT resources increase, but also that such increase has not diverted resources from aid in other sectors (for instance, social and health). 6 One way to check for additionality is to compare trends in AfT and non-aft Official Development Assistance (i.e., ODA minus AfT). 7 On this count, while AfT flows have increased in recent years, non-aft ODA has exhibited a fluctuating trend and, in 2011, was almost at the same level as 2005 (about USD 117 billion) (Figure 2). Meanwhile, over this period, the share of AfT in total ODA went up from 15.5 percent to 22 percent. This could be interpreted to mean that some AfT flows were being fed by diverting resources away from ODA in other sectors. If true, this would be a cause for concern for recipient countries and could only be justified if spending ODA through AfT is relatively more effective in promoting development.

14 ICTSD Programme on Competitiveness and Development 7 Figure 2: Global AfT and Non-AfT ODA flows USD billion, 2011 constant pirces AfT disbursements ODA gross disbursements Non-AfT ODA Source: OECD CRS Database, and OECD.StatExtracts, accessed June AfT to LDCs It would be particularly worrisome if the decrease of non-aft ODA had affected the Least- Developed Countries (LDCs), given their known vulnerabilities and structural weaknesses, and hence their need for sustained AfT flows. Fortunately, the data does not bear this out: AfT in LDCs appears to have been additional since both AfT and Non-AfT ODA have generally increased (Figure 3). LDCs share of AfT has hovered at about 28 percent in recent years. More worrying, in 2011, total ODA flows declined while AfT slightly increased Figure 3: AfT and Non-AfT ODA disbursements in LDCs 80 USD billio, 2010 constant prices AfT disbursements ODA gross disbursements Non-AfT ODA Source: OECD CRS Database, and OECD.StatExtracts, accessed June 2013 A closer inspection at country-specific data shows that AfT flows vary quite significantly among LDCs. Indeed, 20 out of 49 LDCs have attracted 65 percent of total disbursements. The smallest amount of funds have been directed to small islands and small LDCs, which by contrast have usually received more AfT per capita than other countries. Moreover,

15 8 ICTSD Assessing the Effectiveness of Aid for Trade: Lessons from the Ground CRS data reveal that some of the poorest LDCs have received very little in per capita terms typically less than USD 10 over the period While there is no available benchmark to determine the adequacy of AfT funding, these figures indicate that LDCs might not have received a share of AfT resources proportionate to their needs. 3.3 Other Trends OECD data reveals that the bulk of AfT resources has been channelled for building economic infrastructure and productive capacity. Since 2006, funds spent for economic infrastructure amounted to USD 89.4 billion (52 percent of total disbursements). Among these funds, the largest part was spent on transport and storage (56 percent) and in the energy sector (40 percent), whereas the remaining financed projects in the communications sector (figure 4). In the same period, USD 77.5 billion was Figure 4: Aid for Trade, Sectoral Distribution, USD billion, 2011 constant prices TradePolicies&Regulations Tourism MineralResources& Mining Industry Fishing Forestry Agriculture Business &OtherServices Banking & Financial Services Energy Communications Transport&Storage 0,7 2,2 2,0 4,5 3,3 5,2 8,9 10,4 disbursed to build productive capacities (45 percent of total disbursements). Agriculture dominated this category by far, followed by investment in banking and financial services, business and other services, and industry. Finally, 3 percent of funds were channelled for strengthening trade policies and regulations. Among the top five AfT recipient countries, four are in Asia and one in Africa. With USD 5.8 billion received as AfT in 2011, Afghanistan was the largest recipient, c followed by the Democratic Republic of Congo (USD 4.2 billion), Pakistan (USD 2.6 billion), Vietnam (USD 2.1 billion), and India (USD 2 billion). Ethiopia, Iraq, Mozambique, Tanzania and Kenya complete the list of the top ten recipient countries. In terms of donors, the United States is the main AfT provider, followed by European Union institutions, Germany, United Kingdom, France, Japan, the Netherland and Sweden. 0,0 10,0 20,0 30,0 40,0 50,0 60,0 Source: OECD CRS Database, accessed February ,3 Trade policies and regulations Productive capacities Economic infrastructure 32,5 35,7 50,5 3.4 Emerging Economies Trade-Related Aid A significant trend in recent years in the AfT arena is the growing role of emerging economies. These countries are not DAC members and, as such, there is no systemic data and information about their AfT activities. However, various reports have documented their increasing contributions, which nevertheless remain small in comparison with DAC donors. Emerging donors tend to provide development aid in a different way from traditional donors, focusing more on infrastructure and much less on social sectors. Typically, emerging donors maintain development cooperation ties with their neighbouring countries, but they have also expanded their activities to other regions. For instance, China

16 ICTSD Programme on Competitiveness and Development 9 and India, which are the largest providers of aid among non-traditional donors, have conducted aid activities in Africa (admittedly with the aim of advancing trade and investment relations). This has taken place particularly through large funds and credit lines administered by the respective Exim Banks. China generally provides development support through export credit in which concessional and market rate loans are combined. In various cases, partner countries have provided China (more precisely, China s Exim Bank) preferential access to their natural resources as a means to repay loans, as in the case of a USD 6 billion joint venture negotiated in 2007 by China with the Democratic Republic of Congo for infrastructure work in return for a mining concession. 9 Other emerging donors are increasingly emulating the Chinese model by tightening their relations with other developing countries through a mix of aid and investment. There is a perception that aid provided by emerging donors lacks transparency and contains little or no conditionality, thereby undermining DAC members efforts of making aid more effective. While the rapid rise of these new forms of aid pose many challenges for both traditional donors and recipient countries, several studies have challenged these perceptions. 10 For example, AfDB et al (2011) argue that emerging donors tend to adopt a more holistic approach to promoting exports, supporting direct investment and offering development assistance. Recipient countries generally perceive emerging economies aid as less bureaucratic and faster than traditional donors, and more effective at meeting their development needs in infrastructure. 11 Moreover, to the extent that emerging economies tend to support projects that traditional partners usually do not finance, they play a useful role in complementing ODA. The aid relationship between North-South donors can thus be a mutually reinforcing one.

17 10 ICTSD Assessing the Effectiveness of Aid for Trade: Lessons from the Ground 4. INSIGHTS FROM COUNTRY EXPERIENCES IN MANAGING AFT The effectiveness of AfT in boosting traderelated performance depends crucially on a large number of country-specific factors. This section discusses the experience of eight developing countries with AfT projects/programs on the ground. Four of them are classified as LDCs: Bangladesh, Cambodia, Malawi, and Nepal. ICTSD also looked at countries from different income groups to get a more diversified picture of AfT interactions at the national level: in fact, Ghana, Guatemala and the Philippines are lower-middle income economies, whereas Peru is an upper-middle income economy. Other criteria guiding the selection process included the presence of a diversified donor community, investments in various sectors (e.g. infrastructure, agriculture, energy, tourism, services, etc.) as well as geographical considerations. Finally, the host government s interest in collaborating with the local research team throughout the research was critical for building ownership among local institutions in the project. The country experiences indicate that the overall effectiveness and impact of AfT on trade performance has been extremely varied. Not surprisingly, countries that effectively mainstreamed trade in their development strategies, established functional coordination mechanisms both with national constituencies and donor agencies, clearly identified their traderelated constraints and used aid to tackle them witnessed a greater and more positive impact through the use of AfT resources. The following sections provide a detailed analysis of the main findings of these studies according to the different criteria established in the methodology described above. 4.1 Utilisation of AfT Funds Trajectory of funds The positive trend in global AfT disbursements noted in the preceding section is also reflected in the eight country cases. AfT commitments increased in all countries since 2006, except in the Philippines, where pledges decreased by 23 per cent in comparison with Yet, disbursements have increased by 42 per cent in recent years. Disbursements increased in all countries but Bangladesh and Nepal, two of the four LDCs in the sample. This seems to confirm our earlier observation that the disbursement of AfT resources takes place at a slower pace in the world s poorest countries. In order to determine whether AfT was additional, we have to consider not only if AfT resources have increased in an absolute sense since the launch of the initiative in 2006, but also if these funds have not diverted resources from other aid sectors. 12 Only in Cambodia and Peru did both AfT and non-aft resources increase in recent years. It appears, therefore, that trade-related development assistance in these countries was additional; that is, it did not divert resources from other aid sectors. Instead, in Guatemala and Ghana while AfT flows increased, non-aft ODA declined, 13 suggesting that the additional resources for supporting trade-related needs in these two countries might have come at the expense of other aid sectors. Any attempt at assessing additionality of AfT resources is hindered both by the way AfT is defined as well as the monitoring framework of international AfT flows, which is mainly based on donors reporting to the OECD. This difficulty seems to be particularly relevant in light of the limited understanding of the concept of AfT in several aid-recipient countries. In fact, evidence from the eight countries shows that key stakeholders often have a limited knowledge of what AfT means, brings and entails. This was stressed not only by actors from the private sector and civil society, but also in some cases by officials within ministries of trade, finance, other line ministries, as well as by local donor agencies. Indeed, this limited understanding of AfT, both as a concept and in practice, constitutes a key institutional weakness in the operationalization of the initiative, and this despite its growing prominence. As we discuss later, this negatively affects the local ownership of AfT programmes and projects, and hence the effectiveness of the initiative both at the local and global levels.

18 ICTSD Programme on Competitiveness and Development 11 Predictability is one of the core elements of the Paris Declaration as well as a key recommendation made by the WTO Task Force on AfT. Predictability can be defined as the extent to which donors provide reliable commitments over a period of time and disburse aid in a timely and systematic way. 14 Predictability of AfT funds has emerged as a problem in some of the countries, particularly in Nepal, Bangladesh, and Ghana. In these countries, disbursements have not kept up with commitments. Two main factors seem to have negatively affected AfT predictability. First, changes in donor priorities altered the availability of resources in Cambodia, Nepal, Bangladesh, and the Philippines. Second, limited local absorptive capacity has often delayed the release of funds in almost every country, particularly in the LDCs, as further discussed below. Nature of funds Remarkably, the bulk of AfT resources is disbursed in the form of grants. Nevertheless, in some countries, loans constitute a large share of disbursed funds. This can be explained partly by the prevalence of loans in financially demanding economic infrastructure projects, as in the cases of Guatemala, Ghana, Peru, and surprisingly, given its LDC status Bangladesh. On a positive note, overall AfT does not seem to have contributed to increasing the public debt of recipient countries. An exception to this is Ghana: before 2006, the country s public debt ratio was on a significant declining trend, mainly thanks to the Heavily Indebted Poor Country (HIPC) Initiative. In recent years, however, this trend has reversed dramatically. AfT loans might have contributed to this situation. In 2002, the public debt ratio to GDP was at its highest at 93 percent, declining to about 42 percent in Since then, the ratio is on an increasing trend and almost doubled since the AfT initiative started. Absorptive capacity The increased funds generated through the AfT initiative are a welcome development as they allow to tackle some of the existing supply-side constraints hindering developing countries participation in word trade. However, if these flows of aid are not matched by adequate absorptive capacities in the recipient countries, their efficient utilization could be retarded, which could limit AfT s impact on the ground. Unfortunately, absorptive capacities remain weak in almost all the countries analysed. The extent of this problem varies considerably from country to country. For instance, in Peru it is not considered a major problem within ministries, whereas regional and local governments are notoriously deficient in AfT management capacity. The case of Nepal is typical of LDCs. In the Himalayan state, a series of factors clustered into three broad categories were identified as reasons for low absorptive capacity: a) human resource-related; b) systemic factors (internal and external); and c) procedural factors (Table 2). Similarly, in Malawi, stakeholders complained that project effectiveness was hindered by a lack of effective knowledge transfer in training activities. Cambodia, on the other hand, has done better. Having identified capacity building for trade development as a key priority, the government of Cambodia has established mechanisms for intra-government policy coordination, and for consultation among key stakeholders, including the private sector and civil society. But weak absorptive capacity is not unique to LDCs. Lack of technical expertise for project implementation, often addressed by recourse to foreign experts, was a key problem in Guatemala. In the Philippines, delays in project implementation were caused by the fact that the implementing agency not always had the required personnel to implement AfT projects.

19 12 ICTSD Assessing the Effectiveness of Aid for Trade: Lessons from the Ground Table 2: Reason for Low AfT Absorptive Capacity in Nepal Cluster I Human resource-related factors Dearth of qualified human resources. Low capacity of the government in designing projects and implementing them. Poor human resource planning: government s transfer policy, high staff turnover, rewards and penalties not linked to performance, and weak institutional memory. Staff who give more ideas and work more are given more workload without commensurate increase in incentives/ motivation. Low motivation of government employees. Leadership problem at the level of project manager/ director. Internal Cluster II Systemic factors Lack of project banks. Lack of coordination among government agencies and with development partners at the country level. Low priority assigned to trade by government (though with the launch of NTIS, indications are positive). Political instability/ frequent change in governments and their priorities. Not giving sufficient time to the initial planning phase, resulting in delay in project execution. External Private sector getting limited direct support to implement AfT projects Donors onerous procedural/bureaucratic requirements for disbursement. Cluster III Procedural factors Budgetary cycle (mismatch between fiscal year and donor calendar year). Delay in procurement due to provisions in the Procurement Act either due to procedural requirements or to government officials trying to play safe. Difficulty in the timely allocation of counterpart funds. Source: Adhikari, R.K. Paras and S. Chandan S. (2011) 4.2 Ownership at Country Level: Mainstreaming of Trade and Multi- Stakeholder Coordination Mainstreaming of trade as a stepping stone for greater effectiveness Ensuring that developing countries exercise effective ownership over their trade and development policies and coordinate their development actions is a critical element of AfT effectiveness. This is one of the pillars of the Paris Declaration. Local ownership in the context of AfT primarily lies in the recognition of trade as a driver of economic growth, and ultimately of development. This hinges upon in-country awareness and understanding of the cross-cutting nature of trade, as well as the ability to translate this awareness into formal plans and substantive processes (trade mainstreaming) so that the aid-receiving country creates an environment conducive to trade in cooperation with donors, the private sector, and other stakeholders. Trade mainstreaming represents a crucial step in negotiations with donors, and it helps set the ground for results-based intervention programming. As a result, a key expected outcome of the AfT initiative is to promote awareness of the development potential of trade, where the Enhanced Integrated Framework for

20 ICTSD Programme on Competitiveness and Development 13 trade-related assistance for LDCs should have played a pivotal role. Indeed, those countries that have mainstreamed trade in a systematic manner seem to be benefiting the most from AfT. The impact has generally been stronger, resulting in increased export capacities. Although exports are determined by numerous factors, AfT has been successful in creating a strong base for export development while providing new opportunities for export diversification. The cases of Cambodia and, to a certain extent, Bangladesh, are winning examples of where AfT has contributed to boost exports, respectively in the rice and ready garment sectors through an improved business climate, gains in competiveness, and increases in flow of FDI. This will be further discussed in the section on impact. Review of national development plans, strategies and projects reveal fairly diverging levels of trade mainstreaming among countries. On a positive note, trade has been found to be formally mainstreamed in all countries development plans, either fully or partially. For instance, trade has gradually become part of either national strategic development policies (e.g. the National Strategic Development Plan of Cambodia) or specific tradeoriented policy papers (e.g. Plan Estrategico Nacional Exportador PENX of Peru, and Nepal Trade Integration Strategy 2010.). While trade has been mainstreamed in national development plans, there is still a lack of clear understanding among key stakeholders of how trade objectives can be realised through specific activities at the programme level. In recent years in Malawi, for example, the ministry of Agriculture and Food Security has focused on maize production rather than trade, or export diversification. The objective was to first develop productive capacity and then to find markets at a later stage. As a result, some agriculture projects that did mainstream trade had only a limited impact. Due to the current large maize surplus, the government is now realising that trade is important and is starting to move beyond simply focusing on food security. Indeed, since 2010, the government has tried to mainstream trade through the Agriculture Sector Wide Approach. Meanwhile, the main road transport corridors in Malawi are being developed with this trade objective in mind, and the energy sector is also increasingly being driven by trade priorities, both in part financed by AfT resources. At the end of 2012, the new administration adopted a National Export Strategy for the period a first for the country. According to the government, this paradigm shift is intended to serve as a critical component to achieve the millennium development goals [ ] by providing a framework and focus on how Malawi may build its productive capacity. The strategy aims to provide a clearly prioritised and realistic roadmap that Malawi needs in order to develop the productive base of the economy. 15 These efforts to align trade policy with overall development strategy and the Millennium Development Goals should be seen as a positive step in achieving sustainable development though trade. As part of these efforts, the government is now trying to mainstream trade in the Ministry of Agriculture and Food Security, as well as in other line ministries, and to work closely with donors to align aid to this strategy. This is crucial to enhance AfT effectiveness, which so far has been limited in Malawi. Indeed, when aid is part of a sector-wide approach and is integrated into a strategy to address major supply-side bottlenecks to trade, it is more likely to be effective. In this respect, the distinction between formal and substantive mainstreaming of trade is highly relevant. As already observed, all countries have formally mainstreamed trade in their development strategies, in the sense that they have formulated some trade-related objectives and made them part of their development efforts. However, what really matters here is the substantive mainstreaming of trade at the policy level, which occurs, for instance, when trade strategies, policies and actions are clearly determined or when line ministries include trade objectives in their domain, in coordination with the trade authority. The eight countries assessed throughout this project recognize trade as one of the drivers

21 14 ICTSD Assessing the Effectiveness of Aid for Trade: Lessons from the Ground of development in their strategies, but out of these only Cambodia, Peru, Ghana, and Philippines are pursuing an approach in trade promotion that can be qualified as active. Nevertheless, the level of substantive mainstreaming proved to be a weak point in all of the countries. For instance, lack of mainstreaming of trade in the different ministries falling into the cross-cutting nature of trade is quite common, as further discussed in the next section. Lack of recognition of trade at operational levels, for instance at project and programme levels, was observed in Ghana, Malawi, and Bangladesh, whereas in Peru stakeholders complained about the lack of trade mainstreaming at regional or local administrative levels. Substantive mainstreaming of trade, however, is a matter of in-country policy evolution, as illustrated by the recent positive developments in Malawi (described above). Likewise, in Nepal, the transition towards greater mainstreaming of trade within the national policy structures occurred over time: while the Diagnostic Trade Integration Study (DTIS) in 2003/04 involved the Ministry of Commerce and Supply (MoCS) only, the Nepal Trade Integration Study of 2010 already tangibly involved all relevant ministries responsible for implementation of the NTIS, under the coordination of MoCS. Similarly, Cambodia s efforts towards fullerscale trade mainstreaming were embodied in the adoption of the Trade Sector Wide Approach. Along the same lines, the government of Guatemala is now re-defining its priorities within AfT in order to link it with its trade and competitiveness policies, with a view to better managing aid and enhancing its effectiveness. Nevertheless, at the moment there are no clearly defined trade objectives set by the government and the opportunities offered by AfT are not taken into full consideration by the International Trade Policy Framework (Política Integrada de Comercio Exterior). Therefore, even though much room remains for substantive and effective mainstreaming of trade in many developing countries, particularly in the LDCs, evidence from the ground reveals that significant efforts are under way. This is certainly a positive outcome generated through the AfT initiative. In fact, as part of these efforts, many countries have been trying to design AfT strategies aligned with their trade and development policies. Stakeholder coordination in-country dialogue as lever for ownership Deficiencies in trade mainstreaming are usually manifested in a lack of coordination and stakeholder involvement in both the trade-related needs-identification process and the implementation of trade-related programmes such as AfT. In this sense, coordination deficiencies can be classified at two levels. Firstly, government stakeholders, especially line ministries and other agencies, sometimes advance competing interests or agendas. In Malawi, for instance, some ministries tend to behave territorially and defensively in competing for resources. For example, the Ministry of Transport, Public Works and Infrastructure, a key institution in implementing AfT infrastructure projects, does not systematically collaborate with the Ministry of Trade. Consequently, the ministry lacks a thorough understanding of trade needs and priorities, especially in the rail and air sectors. Similarly, in Cambodia, the reason behind limited cooperation is a lack of understanding of trade as a cross-cutting issue. Guatemala, however, provides an interesting counter-example: while intra-government coordination in the field of trade is weak, exporter associations are generally active in promoting national-level coordination. This, for instance, has contributed to raising trade as a priority in the textile and clothing policy agenda, and to a certain extent, in agriculture. Secondly, and more prominently, in-country policy coordination is limited by a truly participatory dialogue comprising all relevant stakeholders. For instance, despite the setting up of national and sectoral working groups and public-private dialogues on issues relating to trade, the Malawian government has failed to adequately engage the private sector in the trade policy process. Coordination with the private sector continues to be constrained by the